EP 294 – Liza Lin – The Wall Street Journal – US Actions Have Spurred China to Become More Self-Sufficient

Read the best-effort transcript below (This technology is still not as good as they say it is…):

Michael Waitze 0:05
Hi, this is Michael Waitze. And welcome back to the Asia Tech Podcast. Today we are joined by Liza Lin, an award-winning China technology correspondent at the Wall Street Journal, and a co author of, “Surveillance State: Inside China’s Quest to Launch a New Era of Social Control.” Liza, it is great to have you on the show. Let’s jump right into this thing. Can you give our listeners a bit of your background for some context?

Liza Lin 0:30
Sure, I’m a Wall Street Journal reporter and I cover and have covered the China corporate and business market for the last 10 years almost.

Michael Waitze 0:44
It’s been an incredible time to be doing that. And for people that may not be familiar with the book that we mentioned at the beginning of this, could you briefly explain the central thesis of this, and its relevance to the technology industry.

Liza Lin 0:56
So the book is a product that my co author Josh and I came up with and we published last year. It’s really a product of a lot of our Wall Street Journal reporting a lot the reporting we did for the Wall Street Journal, when Josh, my co author was based in Beijing, and I was based in Shanghai. And we started the reporting in 2017. And you’re starting to see a lot of new surveillance camera networks pop up on the street. And that kind of piqued our curiosity, because, you know, we I guess we weren’t surprised that the Chinese Communist Party spies on their citizens or surveils citizens what we were surprised with the method, because China’s always been very much analog type of surveillance. You know, you have, even from the Mao days, people telling like party officials or like leadership and villages and cities, about what’s happening in their village or their city or you know, just their housing compound. And then you move on to decades later, where you have the dang’an, and the dang’an’s essentially, like a dossier that everyone has, where at every stage of your life, you know, in school, and when you start working in a factory owned by your state on carmaker or state owned company, people actually fill in bits and pieces about you and you as a person. So it was interesting to me that China started to move down the route of digital surveillance. And the way that they were doing it was really kind of unseen anywhere else in the world. At that point, you know, they were using surveillance cameras, and in particular facial recognition cameras to kind of spot people on the street people of interest to them, like criminals, drug pushers, or folks on the blacklist. Yeah, so that kind of picked up curiosity. And the surveillance state really is the result of reporting on that trend. So in

Michael Waitze 2:49
the old days, like you said, even back during meltdowns, but after that, they would rely on individuals to talk about other individuals. In a way it could provide a benefit to me if I was the one saying that that guy or that guy was doing something wrong. And it feels like it may have created some cohesiveness inside the ruling party where like I’m in and you know, I’m in because I’ve just helped you do something. Does it break a little bit of the connectivity? You think if the surveillance now switches? I wouldn’t say completely, but predominantly digital? Does it remove some of that connection between the individual person in the party? And is that a problem?

Liza Lin 3:21
Yeah, I think what it removes really is the ability for someone to color the data. So, for example, you know, if you were writing about me, and I happen to bring you out for a nice meal, right? Chances are, you’ll likely write something a little bit more positive about me, even if you weren’t intending to. So I think the idea behind digital technology is, you know, at the start, everyone thought, with technology technology with neutral, you couldn’t bias the data. Now we know otherwise, of course, right? With like bad data, you can get bad algorithms and bad outcomes. But back then, you know, 2016 2017, everyone was still kind of E mannered by the idea of technology and the idea that you could have an unbiased outcome. And I think that really was what was driving that too.

Michael Waitze 4:12
Yeah, I mean, to the extent that humans are creating the technology, you’re never going to be removed the biases, and in some ways, those biases actually make it stronger. Let’s switch subjects a little bit. Let’s talk about the US export control policies. Something else where you have a deep interest, how have these export control policies evolved over the past decade, particularly as they concern the semiconductor space?

Liza Lin 4:32
Yeah, so one thing that kind of hit me from reporting and researching the book, and this also eventually became a journal article was that we Josh and I pored through hundreds of government contracts, talking about and procuring components for the surveillance systems that were mushrooming in China. And we found that the basic building blocks of the surveillance systems were components from American tech companies and In particular semiconductors. So you need both high end and low end chips to do everything from, you know, training your algorithm to, to recognize certain faces or images, or even just needing the chips to operate the systems themselves. So yeah, so the semiconductors really became quite an interest of mine. And I think it also piqued the interest of the US government, which realize that American tech was making its way into these systems that could potentially be abused. And there were human rights concerns around them. You asked me about UX US export controls and its history. Well, US export controls are exactly as you might expect, they are they’re essentially banning or blocking the sale of a certain item, in the name of national security or for foreign policy reasons. You know, it really began as a way to stop weapons and military items from flowing to the Soviet Union. And after the Cold War, you know, it became regulation to stop weapons and components from going into like nuclear weapons or weapons of mass destruction and other military type of equipment. What we’ve seen really in the past, I would say six to seven years actually really beginning from the start of the Trump administration is that the export controls have moved from just merely targeting items that are sensitive millet that have a military use, or, you know, a space related use or a nuclear weapon related use to targeting commercial items, commercial items, such as semiconductors. And that is, I guess, no surprise, because, you know, semiconductors play a role in the most cutting edge weapons out there as well, right? If you’re thinking about training a drone, to increase its accuracy rate, on strikes, you use image recognition, and you need high end semiconductors to train the algorithm for it to just get more accurate. So I guess this evolution that we’re seeing is understandable.

Michael Waitze 7:13
I think there are probably some super interesting short term short to medium term implications of this. And then some long term ones as well in this production supply. I’m curious what your insights have have what your research have given you an insight. So

Liza Lin 7:25
in the short term, I mean, the implications are pretty huge. But maybe before we go into the short term implications, I should talk about what some of these export controls are. So the US has actually been, you know, tightening the screws on the flow of semiconductors into China over the last couple of years. And it started with the Trump administration, which banned chips, high end chips in particular and chip technology from going into companies such as Huawei, ZTE, companies that they felt that might prove either were errant companies or might prove to be national security threats for the country. And while we solve following Trump, though, with the Biden administration was, instead of just taking such a narrow, targeted approach, targeting individual companies, the Biden administration basically has come out to say that, you know, whoever has access to the most high end semiconductors, really has access to the most foundational technologies out there. And what the Biden administration did last October, was to put export controls on any advanced chips and chip technology that went into China. So it was a sweeping ban, and far more sweeping and wide and broad, versus what the Trump administration ever did. So now to sell such technology to China, you need a license from the Commerce Department.

Michael Waitze 8:47
I think if you ask most people in the United States who manufactures most of the chips, they would say Chinese companies, and I think they probably lean on TSMC for this, who is designing and manufacturing these sort of very high level chips in United States, just so people can get a sense of who they are.

Liza Lin 9:01
Yeah, the chip supply chain is a little bit more complicated. You have three big steps in making a chip in the production of a chip. First, you have the chip design, and the chip design. A lot of these design companies are American, you know their names that you would probably recognize, and Vidya AMD, a lot of these companies are fabulous in the sense that they just merely design the chips, but they don’t produce the chips, right. And then after designing the chips, you have to produce the chips. These American companies don’t have the factories to make these chips, simply because, you know, to run a fab. It’s a huge investment. It’s billions of dollars. And if you were a designer and you had a factory out there ready to make the chips for you, why would you invest in your own infrastructure to make the chips yourself right when someone could do it cheaper and more efficiently. So the second step of chip production is actually the making of the chip. And these chips are mostly made in Taiwan, and mostly made by the company that you just mentioned TSMC V, which is a Taiwanese company, as opposed to like a mainland Chinese company. So it’s made in Taiwan. And then the final stage of chip production is assembly and testing. You know, when the chip has been made and rolled off the factory floor, it’s sent to places, you know, Malaysia, Costa Rica. These are this is the final stage of production, they’re assembled, and they’re tested to make sure they’re functional and then shipped off to the end customer.

Michael Waitze 10:28
super interesting.

Liza Lin 10:30
Yeah, and it also, I mean, this is also the one reason why chip supply chains are so difficult to disentangle.

Michael Waitze 10:37
I mean, supply chains in general are almost impossible to disentangle. It’s a gigantic problem for the world, we saw that during COVID, we saw that when that ship got stuck in the canal, I mean, just when the supply chain breaks down, everything breaks down, and we can go back even to the earthquake in Japan and the floods in Thailand, you couldn’t get a camera lens, you couldn’t get a glass lens, because 22% of the world’s glass lenses are made in Thailand. Again, it just falls apart everywhere. Okay. I don’t think we got to the answer for what the implications short term and long term or if you want to talk about that, as well.

Liza Lin 11:06
Yeah. So in the short term, I think what you’re seeing is, you know, when when the US actually slept these export controls on China, it was a huge deal for the country, mainly because, you know, for some background, China has been trying to trying and struggling to develop its own chip industry, domestic chip industry is largely been successful in the lower end chips, you know, chips that go into, you know, very simple chips that go into things like toys, right, these noisy toys you see in toy stores, or automotive chips, right, China’s been able to recreate, and they actually have a decent infrastructure, making lower and less mature node, less cutting edge chips, but for the higher end stuff, China’s always struggled, and they remain very reliant on US companies for that. So in the short term, what we’re seeing is, Chinese companies are floundering, because they have been unable to get these higher end trips. And we’ve seen just in this plays out in the data as well, if you look at the export data from China, or sorry, the import data from China, and you look at the customs bureau data for the first six months of the year, you’ve seen chip imports dropped by 20%. year on year versus last year. And Chip making equipment, which is the stuff you need to make these chips that’s also down, it’s down by a similar percentage is 20%. So in the short term, I think you’re seeing China struggling. And the US makers, they’re also because China was the biggest chip importer globally, and a ton of US companies have made money exporting chips to China. So in the short term, you’re definitely seeing companies such as Intel, Nvidia, basically talking about potential profit and revenue hits, because now that markets kind of closed off to them. And some of the biggest chip equipment makers are also American. So there they are, like KLA Lam research, if you’re not in the industry, these these names might not sound so familiar, but they’re, they’re a big deal. And they’ve also come up with a profit warnings

Michael Waitze 13:08
about the long term, the long term seems to me to be that the Chinese are just going to continue to invest even more aggressively in building out the capacity, the ability to build these more sophisticated chips. And at some level is going to change the balance of technological power in the world. I’m curious what you think about that as well?

Liza Lin 13:25
Yes, I think what do you likely see in the longer term, and you’re seeing bits and bobs of that happen now is you’re seeing a bifurcation bifurcation of supply chains. So you’re seeing a supply chain for chip production, just for China, and you’re seeing a supply chain for chips for the rest of the world. You know, from a market efficiency point of view, it sounds so inefficient, right? Why have two different supply chains, but because of these national security concerns, and countries that were shocked into realizing that they couldn’t get chips, all of a sudden during the pandemic, because, you know, China closed factories or some, some link in the supply chain ran through China, and they couldn’t get their products. So because of that, you know, these self sufficiency concerns national security worries, it’s causing supply chains to duplicate. And for China, what you’re seeing is there’s a big government push to support the development of their domestic chip industry, particularly in the high end, whether they’re eventually going to be successful. It’s a different story, but in terms of like the financial backing and the support, you know, it’s there. And one thing that’s that was also new, kind of came up after the Trump administration kind of struck Huawei off chips was you’re seeing Chinese hardware makers that in the past wouldn’t have risked their the functioning of their product on a Chinese ship. They’re now turning and giving some of their procurement to Chinese chip makers, right. Nobody wants to be the next Huawei to be cut off from chips and see when what happened with Huawei was when Huawei was cut off from mobile phone chips We are cut off from American chips, their mobile phone business, which previously was very profitable. And they were a dominant player that evaporated overnight, they couldn’t get the chips to powered mobile phones. So nobody wants to be next Huawei. So everyone’s basically carving out parceling out some of their orders to Chinese chip makers, so that chip makers, the Chinese chip makers actually get good at what they’re doing.

Michael Waitze 15:23
I’m very confident they’re gonna get really good, really fast, you know, necessity is the mother of invention, and particularly with the huge government support that’s going to be thrown their way in the same way that the US government in the 1970s and 1980s provided a ton of support to Intel, to create the US sophisticated chip industry, same thing is gonna happen in China. And I wonder sometimes, if it makes sense for governments to punish other countries like this with with the well known fact, that at the end of the day, they’re just going to become self sufficient. And now you’re hurting your own companies as well, because you’re reducing their profits, which you’ve already mentioned earlier. So two things, how do they impact the US China relations? I want to talk about this first. And then I want to come back to the impact on the companies as well, the United States, because if China does become more self reliant, it’s definitely going to impact the balance of power, which is already changing between the US and China. How do these policies impact these relations?

Liza Lin 16:16
Generally, the jury’s still out on export controls. And the the tricky part about export controls is how do you balance the harm it causes to your own domestic industry with like your national security and foreign policy goals? Right. And in terms of like us, China bilateral relations, it’s been very strained over the last couple of years. And this whole competition on the technology technology front has been left, right and center. I’ll bring it to an event that happened recently, which is the Commerce Secretary Gina Raimondo. She just visited Beijing. And one of the outcomes of her visit was to establish a working group with the Chinese to discuss export controls. And that’s because the Chinese was so worried. Chinese officials are so worried about export controls that that was, you know, the elephant in the room. Even before you discussed commercial, commercial relationship with China, you had to get that out of the room, you didn’t get that out of the way. So that was one of the outcomes of her visit. You know, more broadly, what you’ve seen after the US slept these export controls on chips on China, is there’s been a tit for tat. The Chinese have have not taken this line down. What they have done is to retaliate and in different ways, it might not be a straightforward export ban on multiple products. But Chinese regulators can influence the outcome of some global m&a deals. So what they’ve done is Intel, big US company had tried to acquire Israel and Israeli semiconductor company called tower semiconductor. When you have these large deals you have, you need competition regulators from around the world, the big ones to basically sign off on them. And every competition regulator around the world had signed off on them except the Chinese. What the Chinese was the basically didn’t sign off on them, and they didn’t improve it. So the deadline for the deal came and went. And essentially, you can see the Chinese scuttled, Intel’s move to acquire top tower semiconductor. They’ve also retaliated in other ways like government procurement. So for example, with micron Micron Technology, US semiconductor company, what China did was it told is big, state owned companies not to buy chips from micron technology didn’t give a very detailed, clear reason. But what it said was there’s a national security risk in buying such chips. Right. So you’re actually seeing this tit for tat. China wants to retaliate in No, it doesn’t have it might not be able to use a sweeping ban on certain things to retaliate, but it’s retaliating in small ways. And I guess the final, you know, the final way that it’s been trying to retaliate is it did cut off the world, it said it will put export controls of their own on certain minerals, Galium and germanium, what are the ones the DEA announced? They would put export controls on these minerals. And this really is like, the raw material you need to

Michael Waitze 19:21
make any microchips. Right. Exactly. So money and profits, kind of drive everything that happens in the world. And while this working group you said is in its infancy, right, the commerce secretary came to Beijing to talk about how can we make this better? US companies aren’t going to stand still. We talked about their profits going down, right? Are there workarounds that they’ve had and whether it whether they’re explicit or implicit, how can they kind of get around some of these export controls because I’m sure they’re trying to do this. What does the research bear out on that?

Liza Lin 19:56
Sure. Yeah. So you’re right. You know US companies have shareholders to answer to, and doesn’t mean that when the US government introduces a policy, US companies are all going to be like jumping on the bandwagon and totally cool with it. So why you’ve definitely seen as like us semiconductor companies pushing and lobbying hard for weaker controls on, for example, investment into the semiconductor space or to just make sure that the buck stops here no more further, you know, restrictions on other types of chip technology into China. Yeah, but what we’ve seen on the company front, and I would point out Nvidia and Intel as these two companies that have definitely done it, they’ve introduced less powerful AI chips to the Chinese market. Interesting. What you’re seeing is the US government, obviously, banning chips going into, you know, helping China’s AI space develop. But the companies don’t have these workarounds, where they’re designing chips less powerful, and within the parameters of what’s acceptable, but still going into the AI chip industry within China. So there are these workarounds, companies are still trying to sell to the Chinese market. But you know, they have large legal teams that are helping them make sure that there’s something within the boundaries of what’s legally permissible.

Michael Waitze 21:20
I love these conversations. Like I could talk to you about this forever. It’s so interesting. So given what’s going on, in general, let’s talk about the semiconductor space. And then I want to talk about broader implications before I let you go. But given what’s happening right now, and based on all the research and all the work that you’ve done, and your co author has done on just covering this stuff, what does it look to you like going forward? Right, we’ve already talked about what’s happening. But what do you think is going to look like going forward in the semiconductor industry globally? And what are the implications of that?

Liza Lin 21:47
Yeah, it’s really too early to tell, you know, supply chains are shifting, but you have. I mean, I wish I could have the answers to that. And that really is the million dollar question then. I’m sure even the Intel CEO, Pat Gelsinger. And you know Jensen Huang, who’s head of Nvidia, they want to know, right. But there’s so many factors working into that political, geopolitical and commercial. So it’s, it’s really hard to tell it’s not as simple as saying we’re cutting China off from making more cutting edge smaller non nanometer chips. Because shipping not technology is evolving, as well, you know, China could jump ahead by, you know, creative packaging, they could pack less mature chips together to make them more advanced, or to raise the processing power on them. So yeah, I mean, that really is a question I would like to see answered myself, we’ve actually

Michael Waitze 22:44
seen Apple do that. I mean, Apple obviously designed some really powerful arm chips, but they fuse two of them together to make what are their Mac the max chips, I think as well, right. So it’s not that that’s unprecedented. In the old days, kings and queens used to marry their sons and daughters to other kings and queens to kind of keep the peace. It To be fair, it never really worked that well, at least particularly not in Europe, where they were 100 year wars and stuff like that. But at some level, countries have to figure out a way to get along, right, because there are mutual benefits to it. The Chinese economy is deeply tied to the US economy and vice versa, regardless of how sophisticated the supply chain is, and then just wanted to make the case that at least at some level, this tit for tat stuff, maybe in public is going to keep going on. But at some level, there’s really no benefit for the world’s two biggest superpowers and to wealthiest countries with the two biggest economies to keep doing this anyway.

Liza Lin 23:33
No, I was just gonna say, you know, I was just going to add that the thing about export controls is it does drive a lot of the the such trading underground. Yes, it makes it harder for the Chinese to procure such chips. But there are other workarounds, right? I don’t think the companies themselves are knowingly selling to the Chinese, right? The reputational and financial damages of doing something illegal, like that is just way too high. Now, what you’re seeing definitely is, you know, there are third parties were or countries or even resellers that, like the Chinese could get the chips. And I think it was January this year, where President Biden actually added Macau to the list of banning chip technology and advanced chips from growing us advanced chips and going in there because they were finding that after cutting China off from the advanced chips, China was importing these chips from Macau, and Macau was buying the chips from the US and then China buying the chips from Macau. So there are these like workarounds that are a lot less obvious. So you’re managing to probably cut off a portion of the chips, but you know, if the end customer wants them, don’t get them.

Michael Waitze 24:40
Yeah, I mean, of course, it reminds me in a way of like being a 16 or seven year old if you’ve gone to high school, United States, you’re not allowed to have beer, but boy, there were plenty of keg parties in high school. Humans will always find a workaround. Okay, before I let you go if you zoom out a little bit outside of just the semiconductor industry. Did you want to talk about this in The larger sector or the larger entire tech sector, and maybe what the implications are there, if they’re different? And did you want to bring up the blacklist and the Entity List as well, just to kind of cover all of it.

Liza Lin 25:09
So I think we can probably wrap up with the idea that the US actions have really spurred China to just become more self sufficient. They’ve always wanted to have, you know, their own homegrown tech industry, like domestic tech industry and excelling in all these cutting edge technologies that we’re talking about now. Right, like AI, advanced chips, right? They want their own operating systems. They want their own office software. And for the longest time, because it was just so easy to get such software and hardware and chips from the US. That effort went nowhere. Right, right. You had these like, grandiose state plans, saying that we want to have X amount of this industry, domestic by a certain time, but really, there was no incentive to do it. Right now. The US has given China the incentive to do it. And China is pushing ahead on that front. So I do think like, yes, even though the focus right now is on semiconductors, but I think on a broader level, the writing’s on the wall, and the Chinese officials know that and they’re really trying to pushing for self sufficiency in so many ways, electric vehicles, they’re testing our operating systems. This this is something that’s ongoing, and we’re not seeing it right now. But it’s eventually going to be a big topic going forward.

Michael Waitze 26:40
Liza Lin and award winning China technology correspondent at The Wall Street Journal and co-author of “Surveillance State: Inside China’s Quest to Launch a New Era of Social Control.” Thank you so much for taking the time to join us today. I really appreciate it.

Liza Lin 26:56
My pleasure, Michael.